Regency Centers Corp (REG) 2007 Q4 法說會逐字稿

Good morning. This conference is being recorded. At this time, I would like to welcome everyone to the Regency Centers Corporation's fourth quarter 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

I would now like to turn the conference over to Lisa Palmer, Senior Vice President, Capital Markets. Please go ahead, ma'am.

Thank you and good morning. On the call this morning are Hap Stein, Chairman and CEO; Mary Lou Fiala, President and COO, Bruce Johnson, Chief Financial Officer; Brian Smith, Chief Investment Officer; Chris Leavitt, Senior Vice President and Treasurer; and Jamie Shelton, Vice President of Real Estate Accounting.

Before we start, I would like to address forward-looking statements that may be addressed on the call. Forward-looking statements involve risks and uncertainties. Actual future performance, outcomes and results may differ materially from those expressed in these overlooking statements. Please refer to the documents filed by Regency Centers Corporation with the SEC; specifically, the most recent reports on Form 10-K and 10-Q, which identify important risk factors which could cause actual results to differ from those contained in these forward-looking statements.

I will now turn the call over to Bruce.

Thank you, Lisa, and good morning. And congratulations to the Giants and Tom Coughlin. As you will hear from me and the rest of the team, although the environment in which we operate has become increasingly challenging, Regency continues to execute our strategy and deliver consistent results.

FFO per share in the fourth quarter was $1.16 and $4.20 for the year. This represents over 8% FFO per share growth. Net income for the year was $184 million compared to nearly $199 million in 2006. This decline was due to a lower level of operating property sales and their resulting gains.

In this environment, more than ever, balance sheet strength and flexibility is imperative. Regency's strong balance sheet and co-investment partnerships provide the Company with financial flexibility and reliable internal and external sources of capital to profit from attractive investment opportunities. Between a $1.3 billion capacity available in the open-end fund and our other partnerships, and the capacity currently under our balance sheet, we have access to over $1.8 billion of capital.

Turning to guidance for 2008, we expect FFO per share to be in the range of $0.81 to $0.85 for the first quarter. Given that we are using more cautious assumptions, like more moderate same-store NOI growth, longer development leadtimes and higher cap rates, we have tightened our range of guidance to 8% to 11% growth, which equates to $4.54 to $4.66 for the year.

Let me respond to several note comments regarding pushing out some of our stabilizations past 2008. You need to remember that our shopping centers are significantly leased before they are started, and aren't moved to operating properties until they are 93% leased. Of the $200 million of projects that were pushed to 2009 stabilizations, 10 properties totaling $140 million are 86% to 92% leased today, including anchor-owned stores.

The guidance includes promote income of $21 million to $23 million from one of Regency's co-investment partnerships and is likely to be earned at the end of the year. We view this promote as part of our transaction income. Since our goal is to keep transaction-related income as a percentage of FFO in the 20% range, the promote provides the opportunity to leave an even greater inventory of stabilized developments for future sales and profits, as maintain a sustainable and steady growth rate in excess of 8% is a priority for the Company. And with $470 million of developments representing over $150 million of potential gain already stabilized, we are very well positioned to achieve this.

Given Regency's low payout ratio and the expectation that we'll be at the upper end of our guidance, we have increased the dividend by 10% to $2.90 annually. This is the 13th consecutive year of dividend increases.

I will now turn the call over to Mary Lou to discuss our operating portfolio results.

Thank you, Bruce, and good morning. Regency had another strong year in 2007. Our operating portfolio generated same-store growth of 3.3% for the quarter and an annual growth of 3%. Rent growth was 11.3% for the quarter and 13% for the year. This is the ninth year of averaging over 3% growth, occupancy over 95%, and rental rate growth in excess of 10%.

At the end of 2007, our centers where 95% leased. Leasing activity remained strong as 2 million square feet of space was leased or renewed in our operating and development portfolios, bringing the total for the year to 7.2 million square feet; truly a great effort from our team.

We have exhaustively reviewed the portfolio in light of potential risk of a deteriorating economy. I have spent a lot of time talking to my guys in the field. And even after incorporating many potential '08 risk factors, like an uptick in early tenant move-outs, slower replacement times, increased bankruptcies and potential store closings, and rent growth lower than historical averages due to economic pressure on our retailers, we still expect occupancy to be pretty close to 95% and same-store NOI growth to be in the range of 2.4% to 2.8%, and rent growth to be between 8% to 10%.

There has clearly been a flight to quality. And although the majority of the retailers are moderating their growth plans, there's still a demand for good centers. At Roswell Crossing in Atlanta, Trader Joe's approached us for space. We had recently terminated a party supply store and re-leased to Trader's at a significant rent increase.

At Cloppers Mill in Maryland, Hollywood Video sought to downsize their store. We immediately re-leased this space to Starbucks, over 1,800 square feet, and had a substantial increase of $9 per foot.

Although some retailers have announced planned store closures, given the strength of our anchors and the high quality of our portfolio, we generally don't own the centers where retail stores are closing. For example, last month Starbucks announced planned closures of 350 units, and as their largest landlord for Starbucks in the country, we were able to quickly reach out to them through our relationship and confirm that none of those are in Regency's portfolio.

The majority of our retailers are still opening stores. And in fact, they are very aggressive in top markets for best centers. Our PCI relation is key. We have over a dozen retailer meetings scheduled prior to ICSC in May to review portfolio for new store opportunities. And, quite honestly, most of those meetings have been at the request of the retailer.

Retailers comp sales growth for fourth quarter was 3.5%. This was higher than many estimates. And as you know, grocers and service businesses tend to fare well in a recessionary-like economy. Those of you who attended our Investor Day last November will recall how [John Praiser], who is the head of real estate for Publix, quoted their founder, the late George Jenkins. As responding to the question of how Publix will fare in a recession, he stated that, Publix chooses not to participate in a recession. And their sales count support this.

Grocer comps for the quarter were up 5.5% and the majority of service retailer comps were about 4%. Neighborhood centers are more recession-resistant than any other product type. If you will recall, as I told you last quarter, during the recession of the early '90s, most categories typically found in neighborhood and community centers such as grocery stores, restaurants, drug stores and discount department stores realized continued sales growth. The categories that experienced negative growth were conventional department stores, home related goods, shoes and jewelry stores. And Regency's portfolio of these at-risk retailers represent only 10% annual pro rata based rents.

And actually, a downturn is good for all of us. Retailers make better decisions. They protect their comp store sales. They operate more efficiently and they improve profitability. And all of those factors work in Regency's favor. There are clearly storm clouds on the horizon in 2008, but Regency is well positioned to weather the storm due to the high quality centers with strong anchors and solid demographics, coupled with our PCI strategy that has been implemented by an exceptional team across the country.

I will now turn the call over to Brian for an update on Regency's investment program. Brian?

Thank you, Mary Lou. In the fourth quarter, Regency started seven new developments totaling $137 million. The underwritten returns for these fourth quarter starts averaged near 9%. Returns really tell the whole story, particularly when it comes to quality, retailer demand and risk mitigation, and that's particularly true this quarter. So let me discuss these starts briefly.

The center placing really is a third phase to our very successful existing center, whose first two phases are anchored by Safeway, Target, and Kohl's. Those phases total 273,000 square feet and are 100% leased. The third phase will total 120,000 square feet, of which only 22,000 square feet are shop spaces; so pretty low risk. Leases are already signed with Best Buy, Sports Authority, and we have a signed LOI with a third anchor.

Lower Nazareth Commons in the Northeast region is a 239,000 square foot center anchored by Target, Sports Authority and PetSmart, and shadow-anchored by Wegmans. Again, there's very little shop space in this project; only 20,000 square feet. Demand from both anchors and shop tenants is overwhelming; so much so that we are working on a second phase of 250,000 square feet, which is also oversubscribed, with three times more quality anchor interest than we have available space.

In the Pacific region, Jefferson Square is another neighborhood grocery-anchored center, also with limited shop space. As with all the projects, the demographics are excellent with no need for any residential growth. The three-mile population at Jefferson Square is approximately 87,000 people.

For the entire year, our development starts totaled $379 million with underwritten returns on cost of 9.2% net of JV buyouts. As you know, this level of starts is below the guidance that was provided even as recently as last quarter, and I'd like to explain that variance.

We decided not to count as a start the $94 million project that all along has been in our development starts plan. The land was purchased in November and is a great location. The project has had tremendous leasing demand, as evidenced by the fact that we currently have 58% of the total GLA or over 200,000 square feet accounted for either as a signed lease, a lease that has been fully negotiated and awaiting signature, or in [complete lease] negotiation.

We never begin construction until a center is significantly leased, but given the size of this project, we decided not to consider the project as a start until more of the LOIs and lease drafts are converted into executed contracts.

On the acquisition side, we closed seven new projects into our Oregon partnership, totaling $77 million. Six of the centers were acquired as a portfolio at a 7% cap rate, which is indicative of the fact that we were able to purchase this portfolio at an attractive price on an off-market basis.

While 2007 was an excellent year, we do anticipate some turbulence in 2008. We have reported for a while now that we expect the environment to get more difficult, and in many markets, it has. There are clearly factors in play that have management's attention. Cap rates have risen and likely will continue to rise, although A properties in better markets have been impacted to a much lesser degree, particularly in California. Retailer weakness, especially among the mom-and-pops, which could lead to softening rents and longer lease-up times, lower rents and prices for out lots being offered by banks and restaurants, major retailers being cautious in site selection, and anchors wanting to push out opening dates. All these things put pressure on returns, cause delays, and can erode value.

I think it's important to note that the degree to which these issues are prevalent is a function of geography to a large extent. We're not seeing slowdowns or leasing weakness in those areas with very strong in-fill demographics or in truly high barrier markets. The areas of weakness are in greener markets with lighter population densities. We are also not seeing much slowdown in the Chicago markets, Texas, or other areas where the housing markets were never overheated. In any event, we have adjusted our models to reflect extended lease-up periods in many of the projects.

Conversely, there are also factors working in our favor to shore up returns and enhance values. Cap rates are still low for A quality assets, which are the assets we've always purchased and developed. On the development side, we face much less competition, which is allowing us not only to be more selective on opportunities we see, but also to structure more favorable terms with landowners who are now willing to grant contract extensions and otherwise give us the time we need to adequately manage risk.

Land prices are beginning to soften, as sellers are now more interested in a buyer's ability to close than on getting the highest price. This gives us a major advantage over our competition. Construction costs are down significantly in many of the markets, particularly on the West Coast. Mall developers are having a great deal of difficulty financing projects, which has led to a large increase in the number of joint venture opportunities we are seeing. All these things are helping to offset the negatives, and as a result, the in-process returns are holding up and we are able to be even more selective on the investment opportunities.

The pipeline is in particularly good shape with some of the most solid projects we've ever done. As we have discussed previously, we took steps in 2007 to shore up the pipeline in anticipation of the current environment, and today have a pipeline that enjoys solid in-place demographics.

Our focus has been on the best opportunities anchored by the best retailers. Accordingly, we have dropped projects where we feel less confident that the necessary spreads will hold or where we have concerns that the risks are higher than warranted in this environment. At the same time, we've raised our development return requirements, which reflects an increasing conservativism as we evaluate opportunities.

As a result, our overall pipeline is down compared to a year ago. The total high and medium probability pipeline totals $1.6 billion compared to $1.8 billion at this time last year. On a quarterly basis, current pipeline is $80 million lower than it was three months ago, but this number includes the $137 million of fourth quarter starts that were removed from the pipeline and into production.

We are particularly bullish on the pipeline for several reasons. First, by the time these projects are delivered in two to four years, we fully expect the retail atmosphere to be much more optimistic, and we know the anchors of these projects feel the same way.

Second, the competitive landscape has significantly shifted to benefit Regency. There's less competition and we're able to be more selective and deliberative in our investment opportunities.

Third, the pipeline is full of projects that have been in the works for a long time; in many cases, several years. These projects have taken so long because they are in high barrier markets where retailer demand is very high and we've had the time to execute leases on a very high percentage of the space. Thus, much of the leasing uncertainty has been removed.

Finally, the overall amount of shop space in the projects is very low. On average, 18% of our pipeline GLA is shop space. That compares with an average of 31% for the in-process projects.

Let me give you a few examples of projects in the pipeline. In Texas, we control a large project at an A plus location next to one of the very top malls in the state, where retailers operate stores that are ranked in their top 10 nationally. This site is very much in-fill with 104,000 people in three miles; traffic counts are incredible at 230,000 cars per day. In a state where barriers to entry are not usually thought of, the barriers here are high. As a result, the retail GLA per capita in the area is very low compared to the national average.

As you'd expect, demand for this kind of a site is intense. We have received 16 letters of intent from national credit retailers totaling 300,000 square feet and are working on another 380,000 square feet. Because of the competition for space, we will be able to have our pick of retailers.

In Colorado, we control a price site with incomes in the area exceeding $120,000. Again, we have more demand than we can accommodate from the very best retailers, including Whole Foods and Bed Bath & Beyond.

In Pleasanton, California, we are about to start a project we have been working on for five years. This project will be anchored by Target and Fresh & Easy, with very little shop space. Incomes in the area exceed $120,000.

In Monterey Park, California, there is another project we've been working on for over five years. And this development enjoys insatiable retailer demand. The site has over one mile of frontage on a major freeway with approximately 230,000 cars passing the site each day. The population is extremely dense with over 200,000 people in three miles. Anchors for this project include Home Depot, Target, Kohl's, Best Buy, Toys and Babies R Us, Michael's and others.

In summary, these pipeline projects are so compelling because of the dense demographics and high incomes. The fact that we've been working on them for so long is indicative of the enormous barriers to entry. The long entitlement periods have allowed us to sign up a very large percentage of the space in these centers. And finally, in most of the projects, the percentage of small shops is very low; 10% or so of the total area.

Let me close by saying we are well aware of the hurdles in front of us. These challenges are greatest for some of the in-process projects, as many of those are set to open in 2008, which will be the most difficult year. I do believe the high quality of the projects will hold us in good stead overall. In this environment, the best located and best anchored projects will fare the best. Hap?

Thanks, Brian, Mary Lou, and Bruce.

I'm extremely proud when I look back at the full scope of the accomplishments that Mary Lou, Bruce and Brian described. The high quality portfolio again produced reliable growth in net operating income of 3%. The development program again generated extraordinary value. Nearly $330 million of developments were completed at over 9% return, realizing an estimated $120 million of value. Substantial progress was made on the $1.1 billion of in-process developments, which are 55% funded and 80% leased and committed, and are expected to generate close to a 9% return on investment, and at a 6.6% cap rate, $300 million of future value.

$380 million of new developments were started that are projected to produce returns in excess of 9%. And once again, at that 6.6% cap rate, which is above where cap rates are today, plus the $120 million of net future value.

Capital recycling and co-investment partnerships continued to enable Regency to profitably grow the portfolio while maintaining a strong balance sheet and reliable access to both external and internal sources of capital. We sold $400 million of 10-year bonds at an interest rate of 5.875%. We raised almost $750 million of capital from dispositions of the operating portfolio, contributions from partnerships, sales of developments, partner contributions for acquisitions, and out-parcel and pad sales.

We completed the initial capital raised at the open-end fund, transparent take-out vehicle for our community center developments. And S&P upgraded Regency's investment grade rating to BBB plus.

Regency continued to demonstrate our position as an innovative industry leader with our corporate-wide sustainability and grand genuity initiative. Along with FFO per share growth of 8.2%, these achievements showed off the talent, depth and engagement of Regency's superb management team.

However, as Mary Lou, Bruce, and Brian have explained, and as you know, the world has changed and is changing. 2008 will be a much more challenging environment. The capital markets, as we all know, are in turmoil, adversely impacting the cost and availability of capital. The widening spreads on debt have more than covered the lower treasury rates that we currently see. With interest rates being higher and many investors on the sidelines, cap rates have risen and may rise further, especially for lower quality assets and especially on portfolio sales.

The capital market has moved from being a wash, an unbelievable amount of low cost capital to where there is now a scarcity of capital. The economy as we all read is slowing down, adversely impacting retail sales and tenant demand. There's pressure on occupancy and more store closings, especially mom-and-pops, in challenged categories.

At the same time, as Mary Lou and Brian described, while most retailers are still opening new stores, they are being much more selective and taking much more time to make decisions. Fortunately, Regency is blessed with a strong ship that is built not only to weather, but also to take advantage of these stormy seas. Anchors and side shop retailers still want to be located in Regency's operating properties and new developments. These high quality centers benefit from dominant anchors and markets with attractive demographics. The better chains simply want to be in the better centers. In addition, I expect that again in this cycle, Regency's necessity, convenience-driven shopping centers will demonstrate their resilience to the economic downturn.

$470 million of developments representing over $150 million of gains are already stabilized and currently available for sale or contribution to one of our partnerships. Plus there is $115 million to $240 million of developments, which are expected to be completed by the end of 2008. And as Bruce described, another $140 million that are 86% to 92% leased today and are slated to stabilize in 2009.

The facts that these developments are completed and fully leased or are fast approaching that state, that there is over $1.3 billion of capacity in our co-investment partnerships, provide a huge amount of certainty and comfort regarding a significant portion of Regency's capital recycling plan.

I want to reiterate what Bruce said -- that there is a $1.8 billion of funding capacity in the excess internal funding capability in Regency's balance sheet is added to what is currently available in the co-investment partnerships. In addition, the gains from these assets that are already stabilized or about ready to stabilize, together with the $21 million to $23 million promote, affords Regency a great deal of comfort and transparency to sustain a healthy level of FFO per share growth without putting undo pressure on development sales during the next three years.

Most important of all, Regency's senior management team is cycle-tested. We have learned many lessons from previous capital markets and economic storms. In spite of these great assets in our collective experience, this downturn, I believe, will be a stern test from Regency's management team. We will continue to stay focused on executing Regency's proven strategy. And our priorities will be, number one, maintaining a strong balance sheet and significant funding capacity. And then number two, growing earnings at a rate that is sustainable for the foreseeable future.

Mary Lou and her operations and leasing teams will be keenly focused on maintaining occupancy by leasing space to quality tenants. The development team will be selectively -- will selectively concentrate on the best locations where there's strong tenant demand. At the same time, as Brian said, we will negotiate more time on land contracts, build less shop space-based projects, and plan for longer lease-up times.

It is important to keep perspective, as Brian indicated, and remind everyone that many of these projects that we close on this year will not be completed until the end of 2009 for the first half the 2010, with lease-up projected 24 months later in 2011 or 2012.

I believe that the difficulties in the capital markets and economy will provide us with a silver lining. Regency's local market expertise and excellent relationships to key retailers will result in numerous opportunities. The real test, our real test, will be to use our experience and good judgment to select those opportunities to invest our precious financial and intellectual capital. I think that the Regency team has a pretty good idea of knowing when to hold them and when to fold them.

In summary, the next one to two years should offer real challenges, but should also be extremely exciting. With our high quality portfolio, cycle resistant portfolio of operating properties and new developments, innovative and leading-edge operating systems and initiatives, co-investment partnerships, strong balance sheet, and large inventory of fully baked developments in the promote, Regency is well positioned to weather the storm and take advantage of the current turmoil.

With the more conservative assumptions for NOI growth, cap rates, and lease-up time for developments, we should be able to sustain what, to me, would be a gratifying level of FFO per share growth of 10% to 11% in 2008 followed by 8% in 2009 and 2010.

We appreciate your time and will now answer questions that you may have.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Citi.

This is Ambika with Jon. On both the property management side and development side, Regency appears to be ahead of the curve planning for what's going to happen in the future. I guess, if we're talking about the future, how long do we potentially think that these economic headwinds could last? And in the sense of the property management side and development side, what gives you confidence longer-term that Regency growth will be able to continue, given potentially increasing headwinds?

Well, I'll let Mary Lou and Brian address the issues related to the sustainability of NOI growth and our development program and with the headwinds.

But I think your guess is as good as mine. But my sense is, is that the current economic dip that we're into is -- may be even longer run than shorter; meaning it may be more than a couple of quarters. But who knows? I mean, it could be very shallow. It could be -- but my sense is, it will be a recession. This is me talking. And it may last a few quarters, but then I'm not sure we're going to jump right back out of it with robust economic growth for awhile. But that will happen.

The U.S. economy is very resilient and we'll get on the other side of that, and that's whether it's six months from now or one year from now or two years from now.

Ambika, on the operations side, there's a couple of factors. One is I think we've taken a very realistic approach as we've described our portfolio in '08 and going forward and looking at what we believe could potentially happen.

In '07, ICSC reported that there were 4,700 stores that closed and anticipate that number to go to 5,300 in '08. Regency only had 16 of those in '07. And if you use our ratios, we'd be at about 21 stores. So that's really not been the issue. And so on one hand, we're pretty comfortable in terms of where we fit in. And that all has to do with the team and probably equally or more importantly, is our quality real estate with strong anchors producing above-average sales, high incomes.

But the other thing that gives us comfort beyond the quality of the portfolio and the team and looking at historical numbers and kind of planning those going forward, is really look at the history of what's happened. And you look even in the early '90s, Regency's same-store growth was in the 2.5 to 3% range. And our occupancy only went into the -- it went down to 94.9%.

So even through difficult economic times, A quality real estate sustains much better. And where you see the dip is in the B and C quality real estate. And I really believe over time this is our time to shine.

Ambika, it's Brian. I'll just quickly comment from development side. I don't have a crystal ball, but I will tell you that the retailers tell us, the anchor tenants, that they would just as soon get past 2008. They view 2009 pretty much as getting back to normal. The fact is, they need stores. They may need fewer of them during this period, but the good retailers are going to continue to grow. And they've got to have good stores. And they're doing exactly what you or I would do if we were in their shoes. They're being more selective and they're going to the safest projects. And the safest projects are the ones where they face less competition and where they can take advantage of the highest purchasing power. And those are the kind of projects we're focusing on.

I don't know whether our people noticed, but I think on the -- last week, the interview with the CEO of Penney's in the Wall Street Journal, he indicated, yes, they are cutting back, but they're cutting back from 50 stores a year in '08 and '09, 40 stores a year. So I think that is indicative of what is happening out there. People are still opening stores and these retailers, I think as Lisa pointed out in the last call, are making decisions, a lot of them, for two or three years out.

Okay, great. And then just following up on the JCPenney example, given that JCPenney did reduce their stores from 50 to 40, are you still seeing retailers that are reducing their store growth plans, but still growing, not really changing their growth plans that they have with Regency?

I think that's very typical. Some are not changing, but some are changing a little bit more dramatically, but I think that 20% cutback in Penney's probably is very indicative of what the lion's share of most retailers are doing. They're being a little bit more cautious. They're keeping a little bit of their powder dry, but --.

Yes, I think it's similar to Target. I think they had 150 stores they were planning on doing. And now it's about 118, something like that. But this happened a few quarters ago, as you recall. And we are not seeing any -- the same kind of adjustments that we saw two, three quarters ago.

Christine McElroy, Banc of America.

Your guidance for $200 million to $240 million of contributions to JVs, is that all completed development contributions? Are there any operating properties mixed in there as well? And if that's all development, does that mean that you are projecting 6.6% cap rates on new deliveries?

I think the answer to that is yes.

Okay. And then if that's up from 6.2% last year, does that imply roughly 40 basis points increasing class A cap rates in your view? I think you talked about 25 basis points (multiple speakers) --

Well, part of what's happened here, as you may remember, we have -- there's a cumulative cap rate test that we need to make before in effect we have certainty of contribution into the open-end fund. And what we are doing is we're just kind of using a little bit more conservative cap rates and using that threshold as kind of the basis to do that. So I think that's -- it allowed us to be a little bit more conservative in our projections from where cap rates are today.

So they could actually come in a bit lower?

Yes, because also, Christy, if you'll recall, first of all, clearly having -- especially in times like this, clearly having the fund is a huge benefit to us for the certainty of the take-out. And when we sell to the fund, we save on transaction costs. There's a potential for savings from a tax standpoint. So clearly there is a little bit of a spread there that we're willing to take. So even though these properties may be worth a little more on the open market, it's to our benefit to have the fund there.

And then secondly, the fund buys on in-place income. So, if we sell property that's 100% leased, on an underwritten cap rate, that cap rate could drop by 25 basis points. So although we're projecting at 6.6, you may see us being recording at the end of the year something lower than that.

That's helpful. Thank you.

Christeen Kim, Deutsche Bank.

Following up on Ambika's questions about the retailer expansion plans, Target, JCPenney's, Wal-Mart, have all paired down in terms of their expansion plans at this point. Where do you think the retailers are? I mean, do you think they come back three months from now and then further contract their growth scenarios? Or are they kind of out where they need to be for the rest of the year?

I'll take the in-line retailers. I think that they've been very thoughtful from all of the retailers that we work with in terms of looking at their '08 openings. And quite frankly, even some of them into their '09. And have already taken the biggest portion of their hits. I think you've got centers that are difficult sectors that are still strong. And so I don't anticipate another big hit in terms of the in-line. And I'll let Brian talk about the anchors.

I think it's the same as what Mary Lou is saying. They've already recognized where they are, what's ahead, and they've made the adjustments. And I don't see them paring back.

Target is not making commitments today for 2008. And they are not making commitments today for 2009. They're really making commitments for 2010 and out for the most part. And I think that's the thing to keep in -- that we all need to keep in mind here is a good level of perspective.

As you said, the biggest impact we see is really on the projects that are in process, the ones supposed to be delivered. They would like to push those out as far as they can, just to get through these times. It's not the go forward projects.

Great. That's helpful. And just touching on the guidance, some of your core assumptions of rent growth and the NOI growth seem fairly conservative. Is that just you getting ready for maybe a more difficult 2008 or is there anything else driving that?

Good or bad, I think I've always been accused of being conservative. And I think we're conservative but I also think we're being realistic. And the biggest reason that we've looked at kind of a down trend in same-store NOI has to do with leadtime. So for instance, yesterday Movie Gallery came out and said that they were going to close 400 stores. Of that we have three locations. I looked at the locations and all three are strong. I mean, they're really good locations. I'm very confident that we're going to do that, we'll re-lease it. But because of the slowdown with the retailers, it's going to take us a little bit longer. So part of the reason why -- the majority of the reason why our [accenting] is because of increased downtime. And we think that that's real. And we are conservative.

In terms of rent growth, what we've instructed our organization to do is to do the best that they can in maintaining occupancy. So if it's a good retailer, a strong retailer, where before we would have said okay, you're going to pop market rents and you're going to get 15% increase, today we're going to say, yes, we're going to increase your rents, but we're going to be their partner through a difficult time. And we're not going to increase them at the level that we have at historical levels. We'd rather keep them than lose them, because we're trying to pop rents so high.

So we feel comfortable with our guidance, but we've also spent a great deal of time going through the portfolio and understanding the different components and what we're dealing with.

From my perspective, if anybody thinks that even in the better centers, it isn't going to take a little bit longer to lease vacant space, that we can be able to sustain the rent growth -- levels of rent growth that we've done in the past. And if we aren't going to have a few more bankruptcies than we have, I think they've got their head in their sand. And I think the fact that our operations team has diligently gone over the portfolio and dialed in assumptions that are realistic today. I'm not going to say that they're overly conservative and I'm not going to say -- but at the same time that we're still showing a range of 2.4% to 2.8% with those more moderate assumptions, that's pretty -- in what could be a pretty difficult year, it's pretty gratifying. Obviously, the year could get more difficult or it could even -- there could be some pleasant surprises there.

Yes, the other thing I'd say is we keep in all redevelopments. And we've got more redevelopments going on at the end up '07 and in '08 than we historically had. So when you're closing down anchors and you're redoing a shopping center, you're taking the hit of NOI and you're taking a hit on occupancy. You would have looked at this past year without our redevelopments, our occupancy would have been just about 96%. And that would hold close to true for next year.

So, I think that [our house] of our portfolio continues to be strong. But as Hap said, I think we just need to be very realistic. And what we've said is what we believe will happen.

And I will also say where we might be being a little bit overly conservative is that we're for planning purposes using that 2.4% to 2.8% range as a growth rate going forward. I would like to think that once we come out of these times that we can get back up to the 3% range.

I believe we can.

Great. Thanks for the color.

Paul Morgan, FBR.

Could you maybe help reconcile all the different cap rate data points we have? I mean, there was a lot of chatter when you acquired the portfolio last quarter at a 7 cap and a JV with some of the other numbers in the lower sixes. I mean, maybe you could just pin down for me what a Class A coastal market grocery anchored shopping center would be right now?

I think Class A for most markets in the country is right around 6%. In California, 6% to 6.25%. In California, it's going to be slightly below 6%, about -- call it 5.9%. We see a lot of projects around that we're trying to -- that we look at, we don't buy necessarily, that are about 6%. I think the B's have increased about 100, 150 basis points from where they were a year ago. I think the C's could be up as high as 300. There are just no buyers for those.

And I think also whereas before, Paul, there was a portfolio premium that buyers would pay to aggregate properties; today it's a portfolio discount. So I'm a little bit more cautious with my future view of cap rates than Brian is. But as we continue to see individual transactions, both on what we're selling -- for instance, the San Marcos transaction will be closed at a 6.4, reported as 6.4, there's really a 6, because that included some pre-payment penalties.

But where you've got to raise a lot of capital for a transaction, I think that capital is extremely cautious. And it is more expensive. But we're continuing to be pleasantly surprised by where cap rates on an individual one-off transactions are trading.

And our 7% was off market.

Yes, I was going to add that 7% portfolio, they're probably more A minus properties in a few smaller markets. Probably had it not been off-market, it was a marketed transaction, we believe that that probably would have been in the 6.5% to 6.7% range. But it was part of a larger portfolio of which the buyer basically wanted to sell these fixed assets and chose us -- called us and said, will you please take this. Was more concerned with certainty of execution and closing by year-end than necessarily getting the highest and best price.

Okay. And then on the retailers, some of them have been consistent with sort of your 20% or less, but the Starbucks number of cutting back new store growth in the U.S. was more than that. And then a lot of the lifestyle tenants have been, kind of one after the other, paring back pretty significantly their store growth. And I wonder if that -- if you'd comment on the two of those and with respect to the lifestyle guys, whether that makes you a little bit less inclined to pursue new lifestyle developments, given what they've been doing the past couple of months.

As I've gone through all the retailers and I actually listed it for our Board and for our team and looked at it, and you're right. I mean, it's been anywhere from 10%, quite frankly, up to the highest, which was 27% decline, which was Starbucks. Still being very aggressive, but definitely a pretty substantial number. So we are definitely seeing a cutback in the retailers.

As far as the lifestyle, the in-line retailers, probably because as we talked about in the recession, those soft goods businesses and those are primarily as opposed to necessity-driven businesses that are in our grocery anchor portfolio, they're much more cautious than you see the service retailers. And it all boils down to comps. The grocers are comping well. The services are comping well. But when you get into the side shop, they're definitely much more cautious.

And Brian can talk to our point of view on lifestyle versus neighborhoods or community.

We've never been a big lifestyle developer anyway. Highland village is the only one that's been showing great success. So we do them on a very opportunistic basis. But I do share the concern with that category. The project I told you that we did not count as starts is what we would call a power town. It's got a significant power component to it, of a traditional community center, but it also has some lifestyle -- it's got a lifestyle section. And I think part of the caution led us to just let's wait and see how that one goes before we proceed.

We want to make sure the leases are in place. We're not going to -- we're not taking to the bank LOIs and real estate committee approvals. So there is a -- and you're still only talking about that as $90 million out of $1.6 billion pipeline. So that -- we're very cautious as far as that category.

But there is an increased sensitivity with these retailers, not only in terms of being more cautious in openings of stores, but also especially in the lifestyle retailers with co-tenancy. And definitely that's changed.

Jeffrey Spector, UBS.

Can you just describe again the time line '08 starts to completion to stabilization? I think you said 93%, some sort of timeframe, 2010, 2011?

Well, we would expect to close those starts, meaning close on the land in 2008. You'd start construction either sometime in 2008 or 2009. So in effect, you have construction being completed probably say, some time in 2009 or early 2010. And then you're figuring, we're dialing in now an average of 24 months to lease up properties. So you're talking about in effect completing the lease up of these projects in 2011 or 2012.

How has that lease-up changed? And do you feel at this point your budget, your guidance for '08, really you're very conservative here in that we're not going to hear next quarter that change widened further and stabilizations decreased?

I think this is -- well, how it's changed is within the last six months, six months ago, our average -- and we go through all of our developments rigorously every quarter. And four to six months ago, that average lease-up time was 18 months; that's after completion of construction. I think that we are historically have been at like 12 months, so we're even conservative four to six months ago. This recent quarter review produced a 24 month average lease-up time. I think the guidance that we've given is like $115 million to $240 million. And that assumes -- a few, a number of those projects are very, very close and some are even already fully leased; they've just got to complete construction on.

So we feel I'd say very confident that that range is appropriate. But part of the reason we have the range is some of that lease-up -- one center that's about 80% leased and committed very well could take a little bit longer. That one [was did] at the Highland Village project that Brian referred to. But that is the -- is within the range. So I would be very surprised and disappointed if we had to change the -- you may change the other end of the guidance, but the lower end of the guidance, I'd be very disappointed if that happened.

Thomas Baldwin, Goldman Sachs.

As I look at your leasing activity over the course of 2007, lease renewals as a percentage of total leasing ramped up fairly dramatically in the fourth quarter. By my calculations, to 87% versus an average of 74% in the prior three quarters. Is this what it's going to take to maintain the 95% occupancy level you're targeting for 2008? And if so, when can we expect a return to more normalized levels of new versus renewal leasing?

Well, it was unusual. And I do think what's happened is not so much that we negotiated lower rents to keep them because as you see, we had excellent rent growth for fourth quarter and we really to date haven't seen that back off. But what happened is, is that the retailers, we had planned for a lot of retailers to move out, thinking that there were other opportunities in our centers and some cases that we felt they were a little bit older and that they'd move out.

Well, the reality is they didn't. And I think what you're seeing in the trend is the fact that -- think about it -- if you're a retailer and you're producing strong sales, are you going to go out at this time and start a new center and pay higher rents, pay your TI's, lose sales because you've moved, or are you going to stay put? And they're staying put because of the fact that we have such strong centers. I would anticipate that to occur for awhile. I think people aren't going to be so anxious to move.

I think when I made the comment about tempering our rent growth, you haven't seen that yet. And that has nothing to do with fourth quarter. That's something that we anticipate doing a little bit more in '08, based on if you look at our results.

Okay. Thanks a lot, Mary Lou. Appreciate that. And then my follow-up is, in terms of your development sales program, in 2007 about half of your sales were to third parties versus your co-investment programs. I know you've guided to $200 million to $240 million in contributions to your co-investment program in 2008. But what are your expectations regarding development sales to third parties? Is there still demand in the open market for your community center product?

Before I even let Brian answer that, I'll just step in. We are obligated, the fund has exclusive rights to our community center developments. So anything that is greater than 250,000 square feet including anchor-owned stores is a must offer to open-end funds. So it would be highly unlikely for us to sell any of those properties to an unrelated party.

It would only be the case if for some reason something happened from the time we started the project to when we complete it, that we'd determined that it's an asset we don't want to maintain our ownership in.

But I'll let Brian talk to the third party demands.

Yes, I mean, if, again, if you have an A property in an A market, there's plenty demand. Where you don't want to be is a B product or in a tertiary market.

Or selling several hundred million dollars of properties.

In portfolio, right.

I mean, I think if you look at some of our in-process projects, I'm not sure if they're exactly ones that are stabilizing this year, so I'm doing this off the top of my head. But, yes, there have been some -- we have some underway that we're more opportunistic, you know, single tenant developments where we took a dark anchor and putting in JCPenney's or a gym, those are the types of properties that we would sell to a third party.

Okay. That's very helpful. Thanks a lot, guys.

Michael Mueller, JPMorgan.

Joe Dazio on the phone with Mike. Question about the size of the promote. Relative to three months ago when you first laid out '08 guidance, is that what you expected to be? Or greater or smaller?

It's right where we expected to be. I mean, the range is basically -- I think last quarter we may have said it was contingent on exceeding the [NACREV] index. This is basically our partnership that's been in place since the year 2000. It's on 8 year promote cycle. And we've performed extremely well. We have 7 years behind us from well in excess of [NACREV] returns.

So it is exactly where we thought it would be. The only range is really at year-end, we're going to have to value the portfolio. We've already dialed in a modest increase in cap rates. So if they increase a little bit further, then that's kind of where the range is.

And one of the things that we're also being a little bit tempered by is appraisers are being very cautious today also.

So, then, is it safe to say that the top end of the range was pulled in a little bit for just the more conservative core growth assumptions?

It had something to do with the NOI growth that we're using for 2.4% to 2.8% for '08, but also as we looked out to -- I think as Bruce mentioned and I mentioned -- to '09 and '10, and dialing in and assuming a little bit more conservative assumption for cap rates, and not wanting to -- we just wanted to have what we consider to be a reasonable and sustainable level of development sales which are [let end]. And when you incorporate in a little bit lower growth rate for NOI growth for sustaining in effect 10%, 11% in '08, 8% seemed like a more comfortable number on top of 10% and 11%, rather than on top of 11% or 12% for '09 and 10.

Matt Ostrower, Morgan Stanley.

I guess just one last question. I guess, Mary Lou, for you, could you just contrast a little bit, is there anything you're seeing in this cycle so far that looks operationally different materially from the last economic downturn? I guess a couple of things that come to my mind would be local tenants. And are there any issues of credit quality there, given what's happened in the credit markets? And then -- not to mention the home markets.

And then secondly, I guess a lot of the grocers have gotten into much higher end food, prepared foods and whatnot. Is there any evidence, even anecdotal at this point, that any of those things point to more difficulty this time around?

There is a difference this time to some extent than last time. And a lot of it has to do with the slowdown in homes. Definitely, as I've mentioned before, the real estate offices and in-line mortgage, we're seeing greater move-outs in those than we have historically.

Mom-and-pops -- that's pretty typical of what you've seen in downtime. Certainly as far as our move-outs, it's greater than it has been but not greater than other difficult times. I think it's pretty normal.

The video category is where we've seen a great deal of move-outs anticipated, some directed by us. And that is definitely a sector issue and not an economic issue. It's really supply/demand and where you can buy videos as well as technology.

And the only thing to your point that we have seen that for the first time in fourth quarter is we saw greater move-outs in restaurants. And even though their sales, if you look overall, are still fairly strong, softer than they were the previous quarter, in terms of growth and softer than '06 in terms of growth; we're starting to see just somewhat of a slowdown in the restaurants. I don't necessarily believe that that is prepared foods versus that, because that's been out for a while. I think it really has to do with people just hunkering down and making their own food and being more cautious in what they spend. And making that dollar go a little bit further, especially with gas prices. So, that's kind of the color on that.

Okay. And then lastly, I guess, I didn't hear you address this specifically, Hap. Is there anything obvious in your mind looking out the next couple of years where you think there's really going to be a compelling investment opportunity that wasn't there before for Regency? I mean everything that we're hearing is that the higher quality stuff which is what you guys want to own is pretty stable in price and fundamentals. I mean I guess maybe a little bit on the margin, I'm hearing you say there could be some developmental opportunities, I guess. Anything else that you can think of that might end up presenting an opportunity for your Company?

I think there's obviously some interesting opportunities outside of the U.S. that we're looking at carefully. And there's been a lot of market dislocation in the Australian market. But we haven't yet figured out how to take advantage of that in a way that makes sense for our shareholders. And we are evaluating as far as moving other markets beyond the U.S. borders, can we profitably utilize our core competencies of asset management, operations systems and development to take advantage of the right opportunity there without taking our focus off the current opportunities we have in the U.S., so --.

What's your instinct about that?

There have been some intriguing opportunities there. Whether any of those can come to fruition or not, we'll see. It's not something that we feel that we have to do. If we can find the right opportunity and the right circumstances, we take advantage of it.

[David Wiggington], Merrill Lynch.

It's Craig Schmidt at Merrill Lynch. I just wanted to touch on minimum development yield requirements. And I'm looking at Jefferson Square which was newly added to your [improv sestal] developments. And they have an NOI yield after participation is 7.86. I just wondered, at what point is the NOI yield too low and what makes you take lower yields on certain projects? Is it geography, anchors or anything else?

That one's too low. Jefferson Square is the anomaly. I think we gave up 145 basis points on that one between the project level return and the return after we buy out the partner. That was one of those JVs that was done at a period of time when we were probably at its frenzy-ist and in order to get that deal we had to do that.

The way we figure out which returns we're going to go to, we do have a band that we have to stay within. For those, like the project up in the Pacific Northwest where we had no development risk, it was just a redevelopment, a re-tenanting, we would have done that at a pretty low return. As it turned out, it was one of our highest returns.

But it's really just a function of risk and risk-adjusted returns. So the more shop space we've got, the more difficult the area, the worst demographics, we either wouldn't do it or we're going to do it at a return that compensates it for us.

In most cases, too, and Brian can speak specifically to Jefferson Square, but the partner participation is oftentimes based on what market cap rates are when you're buying your partner out. So as cap rates rise between now and then, these after partner participation yields will rise with the cap rates.

On Jefferson Square in particular, if the cap rates increased 50 basis points for example, the net return to us on the Jefferson after the buy-out would increase 35 basis points.

What is the going in return on that before partner buy-out, Brian?

9.31%.

I think the thing to keep in mind is, is you've got a risk-adjusted return on that project of 9.31, under which we have a preference on. And as Brian and Lisa indicated, the lower the cap rate, the lower our ultimate return, but in effect, the higher the margin. The higher the cap rate, our higher return, but the higher margin. The key point is we're protected there. You've got 9.3% going in return.

Having said all that, and given the fact that some of that projects that are already in the pipeline have already been approved by the -- either Capital Allocation Committee or the Investment Committee, we did raise our minimum return threshold from 8% to 8.25% at the last quarter. There may be some stuff that's already been approved that may come through later.

That's helpful. And then another question just for my benefit. If I take a look at development starts from '05 through a midpoint '08 estimate and compared them to development stabilizations, I'm getting development starts of about $1.7 billion but development stabilization of $981 million. Over time, wouldn't those numbers be similar?

Yes, what we expect. Remember, we've got 1.1 or $1.0 billion or $1.1 billion in process. So you have to add that to what we stabilized to get to the starts.

And over time what you expect is as long as we maintain the same level of starts, you're going to have the same number of starts as stabilizations each year. All things being equal.

But as you heard Hap say, we've extended our lease-up time on those that are in process. So for this year you're going to see a slightly lower level of stabilizations which would say that in future years, we're going to have a greater number of stabilizations than we will starts -- but they should average the same over a period of time.

It may even extend a little bit into '09 at a lower level but starting in '10 et cetera should be at higher levels.

Seems like some of this year's push out in stabilizations had to do with the slower lease-up but also some had to do with the entitlement delays we face in these high barrier markets.

And from a stabilizations standpoint, as Bruce pointed out and I did, there were $140 million of projects that were expected to be stabilized, previously expect to be stabilized in '08 that are now 86% to 92% leased that we pushed into '09.

So I'm just looking at the development starts of $503 million in '06, could you still have some of those that have yet to stabilize?

(multiple speakers) Some of those may not have started construction until '07.

And at this time there are no further questions in our queue. I'll turn the conference back over to our presenters for any additional or closing comments.

We appreciate your taking the time to join us on the call and your interest in Regency, and hope that everybody enjoys the rest of the week and has a very good weekend. Thank you very much.

This does conclude today's conference. Thank you for your participation. You may disconnect.